China’s Re-balancing of Economy Might be Working

China recently released March numbers that showed the country had an increase in exports and slowdown in imports, creating a trade surplus. However, there may be more than what meets the eye. Analysts are sticking by their longer term estimates of a smaller trade surplus. Investors are expecting the IMF to come out and lower the long term forecast for China’s trade surplus in the next week or so. Some speculators argue that this is good for China because they are finally rebalancing their economy. Rather than just relying on exports, China could start importing more goods to consume. However, it appears that the imbalance is actually getting worse. If you look at historical data, you will find that China’s trade surplus peaked at 8.8% of GDP in 2007. In 2011, the surplus had dwindled down to 2.6%.

The interesting thing is that China’s investments SPDR S&P China (ETF) (NYSEARCA:GXC) rose 48.6% of GDP in 2010 from 41.7% in 2007. As you can see, increased investment doesn’t always been increased growth. The purpose of investment is to help promote consumption, which in turn, promotes growth. Most of the investment was done through state-owned banks which have been handing loans out like hotcakes. Unfortunately, this could lead to default and disaster later.

Consumption is a habit so when you no longer have the high flying wage that you once had; it is going to be hard to limit your consumption. Despite the fact that consumption is expected to stay relatively the same, growth is predicted to cool off in the coming years.

Luckily, there is a solution to rebalancing the economy and getting consumers back out there but it would require the Chinese government to take a step towards capitalism. If the government was to decrease the state owned monopolies in banking and other sectors, that would open up room for entrepreneurs to come in and take a chunk of that money. That money then turns into wages for workers and soon it is used to consume products. This will help rebalance the economy and get China to focus on imports, not just exports.

China’s economy will be slowing in the coming years, even by government estimates. If they simply took out the monopoly status of some of the state owned businesses, it would promote growth. They would then balance their economy on imports and exports which is important if you want a truly healthy economy.